So many Australians are terrified of share investing because of the risk in buying shares, and also because they don’t feel comfortable with their ability to make money on their money. If that’s the case – paper trading, i.e. “fake-vesting” might just be for you.
Paper trading is essentially the sharemarket’s version of try before you buy. Also known as fake-vesting, it’s a process that helps you get a sense for how your money would theoretically dip and grow before you actually invest anything physical.
For the uninitiated, it’s an introduction into how the share market works, what different share vehicles look like, and how that growth and loss might actually affect your principal investment (the money you initially invested) in a real-world fluctuation scenario.
Ah, fluctuation. If there’s anything that’s a certainty in investing, it’s that your money is going to change in value. Sometimes many times a day, certainly many times a week and most likely, many times in the year. And disclaimer: that’s totally normal.
The value of stock moves constantly because of market forces – like hype, which affects supply and demand, as well as world events, public perception and even propaganda. By the way, a great watch for how inciting propaganda can affect share market value is the Bill Ackman war on Herbalife documentary ‘Betting On Zero’. Really interesting stuff.
So, think of paper trading as an investing game. It’s the stock version of Monopoly. You’re not really buying Mayfair, nor are you really buying the real estate investment trust managed fund that now owns Mayfair. Instead, you’re trying your hand to see what it might look like if you did.
You can paper trade in a few different ways, using online games (stock market simulators), weekly trackers or, if you’ve got the time to actively manage your virtual portfolio, through an Excel spreadsheet.
One tool I used to love for playing with stocks was the Google Finance tool. It had this rockstar feature where you could add any stock to your virtual portfolio and manage it from there. Essentially, you’d pick a stock, a date you bought it and then how much theoretical money you would have used to buy it. You’d work this out by looking at the current share price and calculating how many shares you could afford with the theoretical sum you’d use for a purchase of that type.
You could then see the “day’s return” and the overall return of the stock, and compare it with others in your portfolio. It always used real trading information so the returns were accurate – it’s just the capital that was missing. It wasn’t perfect, though. Some things I remember about Google Finance was that it didn’t show aggregate returns of an entire portfolio the way some brokerage platforms would – just individual stocks, and it was very American (including lots of terms we don’t really use here).
This is largely how most similar simulators work, by and large – just with less bells and whistles.
Unfortunately, Google Finance appears to have lost a lot of that original functionality but I’d still recommend it to get a good overview of how to assess a worthwhile stock holding. It’s also so interesting to watch how the stocks move in real-time. Remember the fluctuations note? Watch how share prices hop to and fro every few minutes and you’ll start to see why fluctuations are par for the course.
Next up is the ASX Sharemarket Game. Some of us might remember doing a version of this when we were in school (which was technically a straight shot to teaching kids how to gamble), but if the public version is anything to go off of, it’ll be a decent learning experience.
The premise is that you get $50,000 in virtual cash to invest over 15 weeks (representing three and a half months of potential profits to be gained). You should aim to have diversification across your portfolio by getting access to over 200 companies listed on the ASX, with their live prices, and you will have to pay brokerage (the cost of initiating the trade) using your virtual money.
You can see everything through your main portfolio dashboard, and you can even implement stop-loss orders, which is where you set instructions for automatic selling once your holding loses a certain amount of value, usually dropping under a specified share price.
This is interesting to play with (the purpose is to minimise loss as much as possible), but I personally don’t worry about stop-losses because prices typically recover – and then invariably grow – over a long enough period. This is why you can take the 15 week timeline with a pinch of salt. It’s not indicative of long-term return and that’s really the secret sauce for financial independence, retire early followers. We depend on our shares for income, so letting them ride and compound is in our best interest. This can be over ten, twenty, thirty years… or forever.
StockWatch works very similarly, except that it’s limited only to the top 200 ASX-listed companies, which means no exposure to international companies. As we’re fairly small in global terms (and heavily resource-based), this can be quite limiting. In the real world, having both Australian and global picks is a much better representation of share diversity.
One thing I particularly like about this platform though is the community forum, which is great for finding investment resources and things to read up on to help with strategy. Know that the advice isn’t always sound, though. In fact, they’re mostly opinions, but it’s a good way to share ideas and see how others are doing with paper trading.
If you’re not too techy and the idea of putting all of your information into a game doesn’t work for you, you can keep an eye on stock movements via an Excel spreadsheet. In fact, this is what my husband and I do before we invest into anything. It’s much more manual and doesn’t update anything in real-time, but we can manually collate market movements every couple of months.
We usually have our eye on a few different stocks before we invest in them, and we typically look closely at the one-year performance, three-year performance, the management fee and the 52-week low and high (the lowest and highest points it has traded at over a yearly period) through our Excel comparisons.
Once I have that information, I can work out how much my shares would be worth had I invested a default amount – usually buying around 50 units, but it depends on the share price of course – over that year, three years and more, less the management fee.
If I wanted to dive deeper, I could also work out how much the reinvested dividends (the payments I had opted to have returned to the portfolio for more compound growth) would have impacted the overall return. It’s not going to be completely accurate, of course, and doesn’t easily account for losses, but it’s a sound start for wrapping your head around the numbers.
So how long should you paper trade for in order to get more savvy with it?
I’d think of it less a blanket time frame, because various share vehicles will appreciate across very different time periods.
For example, some established companies are already experiencing strong shareholder returns, while others may not perform well until later, when our consumer habits mean there are more demand for those products (think ethical industries and new technologies).
Instead, reframe it as an answer to the question: “how long will it take me to save a pool of money that I’m comfortable actually investing in the share market?”. If it will take you six months to save $10,000, and that’s what you’d like to use to foray into share investing, then use that six months as a runway to start paper trading before you do the real thing.
My personal ethos on investing is always the same – it’s really never too early to get started. This is for a couple of reasons:
If you’re new to investing, the concept of buying “shares on sale” is actually redundant. This is why some people like to “practice” first – so they can nab a bargain when it comes up. But with no exposure to the real market, you won’t really know what a share sale looks like. Thus, everything is always relative to your context at the time.
Secondly, it’s never about timing the market – it’s about time in the market.
Shares, whether they be individual company stocks (i.e. owning a business directly), or exchange-traded funds (i.e. ownership into a fund that tracks market indexes) have always performed well over time. That is to say that many historically have always gone up at a rate that significantly exceeds inflation and yields exciting returns.
Reckon you could turn $200k into a million big ones over the next decade? The best thing is to Nike it. Just do it.
But understandably, if you want to try your hand first, paper trading is a good place to start. In any purchase, the ability to try before you buy is a very sound strategy. Just remember that while you won’t make any actual losses, you also won’t make any gains either.